Zero-Based Budgeting And It’s Negative Impact On Brand Building

Zero-Based Budgeting (ZBB) is taking the business world by storm, ushering in an era of corporate austerity that has global companies operating leaner and more efficiently than ever before.

Traditionally, companies draw up this year’s budget by amending last year’s. Not so with ZBB. With ZBB, the budget starts from scratch each year or cycle. Every single expense has to be justified—from billion dollar advertising budgets all the way down to office supplies. Not a single line item gets grandfathered in. ZBB aims to trim institutional fat structurally and prevent yesterday’s needs from showing up on today’s budget. It doesn’t matter that you funded staff to travel 30 percent of the time last year—what do they need to travel for this year? Can’t they use web-meeting technology instead? You spent $500,000 on a brand equity tracker last quarter—did that deliver clear, measureable short-term ROI? If not, it’s cut, and if you can’t cut it, then perhaps you are cut.

Zero-Based Budgeting is not new. It was pioneered five decades ago by Pete Pyhrran, an accounting manager at Texas Instruments Inc. Jimmy Carter campaigned on ZBB by name in the 1976 presidential debates. Upon election, he delivered billions in savings to US taxpayers by questioning the federal budget every year. It worked. Still, ZBB never really saw wide adoption in the private sector—until now.

A Champion Emerges

ZBB now has a champion: Brazilian hedge fund 3G Capital, which has received accolades for using ZBB to turn around many major acquisitions. 3G Capital oversaw the 2008 takeover of Anheuser-Busch by InBev, forming AB-InBev, axing 1,400 jobs and diverting funds to highest ROI investments. They also acquired Heinz in 2013 and instituted ZBB, saving the company $1.5 billion by cutting 2,000 jobs and closing three plants. Investors liked this so much that, when 3G Capital recently announced it was acquiring Kraft Food Group and merging it with Heinz, even the great Warren Buffett invested alongside 3G Capital because the expected return was so high. 3G Capital reduced Tim Hortons’s expenses by a staggering 32 percent in the first quarter of ZBB. When they put ZBB to use at Burger King, profits rose 37 percent.

ZBB delivers on its promise: it cuts expenses and reallocates available investment dollars to where they can achieve maximum ROI.

Returns like these have made ZBB popular on Wall Street. More and more savvy investors are demanding that CEOs institute ZBB—or else.

What choice does the C-suite have? ZBB has them on the chopping block as well. When 3G Capital acquired Heinz, they replaced the CEO and purged 11 of the other top 12 executives immediately, replacing many with executives from other 3G companies. The message is clear: get onboard with ZBB or get ready for the C-suite to be raided and expunged.

ZBB Is Here to Stay

This isn’t just the work of one rogue private equity firm. Unilever announced this year that it was rolling out a company-wide ZBB plan following a successful pilot program in Thailand that reduced its overall spending there by 2 percentage points as a share of sales last year.

Activist shareholders are also using ZBB to make quick profits. They invest in inefficient companies, force adoption of ZBB, and then flip the stock for titanic gains. This happens all of the time. Bill Ackman, activist shareholder and outspoken proponent of ZBB, just took a 7.5 percent stake in Mondelez and we now see CEO Irene Rosenfeld implementing ZBB, saving $1 billion a year already.

The problem is that quick profits don’t necessarily make for a great company or enhance long-term brand value. Wall Street cares more about quarterly profits than the long-term viability of a company and long term brand building.

At the end of the day, you can’t really blame investors. Their job is to maximize returns to the current shareholders. Wall Street loves ZBB for one reason: it works. It saves money and drives quick profits and higher stock prices.

Cut your Marketing and You Could Gut your Brand

Unfortunately what’s good for the next quarter isn’t always good for the long-term viability of a company or brand. ZBB creates a culture of austerity. When everything is up on the chopping block and management is expecting cuts, cutswill be found—whether they make sense or not. And when these cuts go too deep, they can hit the brand equity bone. Brand equity, the premium the market is willing to pay for a product, is built primarily through advertising and product experiences. Budget cuts that result in a quick jump in profits can simultaneously and, just as easily, lead to a bigger reduction in revenue and profit over time if they hurt brand equity.

This is exactly what happens when non-working marketing dollars are cut. These dollars aren’t spent on consumer-targeted media that aims to boost sales. They instead go to agency creative fees, strategic planning, consulting, salaries, and consumer insights that allow companies to make smart decisions about brand development and management. None of this will make products fly off the shelf tomorrow, but it is crucial to the kind of brand development that leads to more sales, greater market share, and higher long-term valuations.

This value may be hard to trace back to the source, but it is real. My friend, David Kincaid, author of the book The Value of a Promise Consistently Kept, points out that 60 percent of the S&P 500 is intangible value—that’s $10 trillion! This is the goodwill value of the brands associated with companies. This value is hard won but easily destroyed.

Unfortunately, ZBB often favours the quick exposure and tangible results that working marketing dollars (i.e advertising) can provide. Under ZBB, companies tend to get as many dollars working as possible, often as much as 90 percent of the marketing budget, as is the case with AB-InBev. This means fewer non-working marketing dollars for brand building. This can hurt the bottom line. Consider Diageo, the world’s largest spirits company, which made deep cuts in spending on insights. Diageo’s North American net sales subsequently fell 2 percent, according to Wall Street Journal. Seeing the error of their ways, Diageo told the Wall Street Journal that the company was going to reverse course and return to investing in consumer insights.

Deirdre Mahlan, head of Digageo’s North American division, put it best: “Just because you have distribution does not mean you’re going to grow brands for the sustainable future […] We are structuring ourselves now in a much more deliberate and specific way because we think we’ve been under-delivering our potential with respect to consumer insights.”

Insights professionals around the world rejoice at these words. Here we have a high-level executive at a multi-billion-dollar CPG company asking Wall Street to please have faith in the power of consumer insights to drive better performance. She is telling Wall Street: Invest in marketing insights. Invest in building brands in a strategic way rather than focusing solely on ZBB tactics.

Unfortunately, Wall Street isn’t always listening. Under ZBB, insights and other crucial marketing departments often face debilitating cuts. 3G Capital has cut Kraft Canada’s insights department from eighteen fulltime staff down to four. The insights professionals that remain are highly talented, the best of the best, but so strapped for resources and manpower they will no doubt find it challenging to strategically build Kraft brands.

Navigating the New Normal

In such a hostile environment, how can brand builders protect and build the brands they worked so hard to build?

The answer is not to fight ZBB. It is too profitable and effective and companies cannot fight against Wall Street or remain competitive if their competitors are doing the same. Companies have to work within the confines of ZBB.

Smart marketers will do at least two things to adapt to a ZBB world: First, make the case for non-working marketing dollars, pointing to cases like Diageo and it’s 2 percent sales drop as proof that investing in consumer insights is necessary.

Second, work to achieve greater efficiency with the marketing dollars you do have. This requires a keen understanding of how brands grow and the role of advertising in creating top-of-mind awareness among consumers.

Achieving this efficiency is a complex subject that cannot be covered in a brief article. But what it boils down to is this: Smart marketers use dollars to create an emotional response in the hearts and minds of the public. Brands have to find their “Right Space”—the emotional space best suited to building their particular brand and driving profits—and then use the marketing budget to make sure that all touch points are aligned with the Right Space, and only within the Right Space. This must be done with a relentless consistency in order not to undermine your own efforts and waste scarce marketing dollars.

How this is done is no better exemplified than by Apple—one of the world’s most valuable brands. Apple has publicly stated that it makes every single business decision by targeting four key emotions: delight, surprise, love, and connection. They start by determining how they want people to feel and then deliver on that relentlessly across all touch points—devices, stores, websites, customer service,everything. They take an emotion-based formula to brand building and wow has it ever worked.

The Right Space done right can deliver remarkable results even on lean budgets. Consider Under Armour, a challenger brand competing in a similar emotional space as Nike. Under Armour’s “I Will” marketing campaign is reminiscent of Nike’s iconic “Just Do it” campaign, but Under Armour has been consistently delivering their message across all touch points, including the web, TV commercials, mobile, products and packaging, and everything else. Unleashed in 2013, it was the company’s biggest global ad campaign to date and netted the company the Advertiser of the Year award from Advertising Age.

This is a powerful lesson for marketing departments operating in a ZBB environment. They have to make every dollar count. And the winners have. Under Armour’s 2013 U.S. measured-media spending was only $18 million. Compare that to Nike, which spent $64 million the same year. Nonetheless, Under Armour is growing at three times the pace of Nike.

The key difference is that Under Armour is executing on its Right Space consistently. They evoke the same, right feelings in consumers with everything they do. They make their customers feel self-challenged, accomplished, and proactive in life. The brand oozes an “I Will” attitude not just in their commercials, but in everything they do. Effective marketing is relentlessly consistent or it is nothing. This is how to build mental structures, top of mind awareness, and drive sales, as Byron Sharp explains in his seminal book How Brands Grow. Conversely, inconsistent messaging destroys advertising efficiency, undermining the goal of ZBB.

And yet, marketers are notorious for constantly changing and tweaking anything and everything, sometimes just to justify their own staff and budgets and to put their fingerprints on something new. Companies can’t (and shouldn’t) do that when operating lean—or ever, for that matter. It’s counterproductive. Inconsistent brand identity keeps consumers from forming an emotional bond with the brand. Consistency is key. Logos, packages, spokespeople, advertising, and everything the company does or creates must be in alignment—tuned against the Right Space—or you end up with your marketing dollars working against each other .

Phil Duncan, the Chief Design Officer at P&G stated this challenge perfectly when he said, “It is the responsibility of brand teams to write the next chapter for the P&G book, not to write a new book. The goal is always to keep the story interesting and moving forward.”

This strategy is effective and efficient, but neither automatic nor free. It takes staff and it takes investment. The insights team must identify the right emotional space that will make a brand speak to consumers. Marketers must execute on that Right Space and make sure the right emotions are delivered at all times without fail. And it is the CMO’s job to oversee all of this and make the case that marketing dollars have a necessary and key place in this year’s budget—and next year’s, and the next.

If you’re a marketer or insights professional under pressure from ZBB you need to do two things. First, you need to make the case for non-working marketing dollars. You will be hard pressed to build your brand strategically on working dollars alone. It takes not just ad spots to build a brand, but also strategic planning. Second, use those non-working marketing dollars effectively and efficiently by finding your brand’s Right Space and then executing that space with relentless consistency across all touch points in order to build and maintain your brand.

Don’t let your company sell out its brand in the name of short-term profits. It’s likely that your brand is your most valuable asset that drives your P&L. But brands are as delicate as they are powerful and valuable. They need to be cultivated without exception. Operating efficiently and operating lean are not always the same thing. Now more than ever brand builders need to make that case and then deliver on it in order to succeed.